Many companies use 31 March as the accounting reference date. Now is an excellent time to review the position of directors’ current accounts for close companies.
It is a standard error, if a company charges an interest rate on a loan that is made to the participators or employees, there are no tax consequences. In fact, whilst doing this, it does protect against a benefit in kind arising, there is a further consideration for the company.
A charge arises under CTA 2010, s. 455 where amounts are due at the accounting year-end and these are not repaid within nine months. The payment is made at 32.5% of the amount outstanding, but it is temporary and is repaid once the owed monies are repaid to the company.
455 doesn’t apply to:
- Loans made in the ordinary course of a business. This includes loans made by banking and credit terms on the sale of goods to a participator. Similar to the credit facilities offered to members of the public, providing the credit period does not exceed six months.
- Loans less than £15,000, made to directors or employees who work full time for a company, who do not have a material interest in the company.
The charge doesn’t apply to overdrawn directors’ current accounts. The £15,000 exception doesn’t apply if the director is also a shareholder with a material interest. There is no de minimis on the loan’s size that will trigger a charge.
The nine-month grace period does allow the director to pay the loan back. Many may struggle to do that from private funds this year due to the Covid-19 crisis.
Participators in close companies tend to have a high degree of control over their payment, there are some other options to help.
Vote a bonus
Voting an extra payment of salary and crediting this to the overdrawn account is one method. The advantage of doing this is that it attracts a deduction from the company’s taxable profits. The drawback is that it must be processed via the payroll and have tax and NI deducted.
Vote a dividend
This is a similar method but involves crediting a dividend instead of a salary. There is no deduction for corporation tax, but there is no NI to pay either. The dividend will be taxable in the participator’s hands but at lower rates that apply to bonuses. It will also be payable via self-assessment rather than PAYE, so there is a timing advantage.
This will only be an option if there are distributable profits to pay dividends. Covid-19 has affected this method, so a company must ensure caution is in place to make sure a clear picture is obtained before voting the dividend.
Write off the loan
If the loan is written off, the participator is treated as receiving a distribution equal to the amount released. There is a risk that HMRC will try to treat this as “earnings” for NI purposes, so the dividend option is better. The write-off should be made in writing or further risk the debt that would be pursued in the event of a liquidation.